China Said to Study IBM Servers for Security Risk in Spy Dispute

The Chinese government is reviewing whether domestic banks’ reliance on high-end servers from International Business Machines Corp. compromises the nation’s financial security, people familiar with the matter said, in an escalation of the dispute with the U.S. over spying claims.

Government agencies, including the People’s Bank of China and the Ministry of Finance, are asking banks to remove the IBM servers and replace them with a local brand as part of a trial program, said the four people, who asked not to be identified because the review hasn’t been made public.

The review fits a broader pattern of retaliation after American prosecutors indicted five Chinese military officers for allegedly hacking into the computers of U.S. companies and stealing secrets. Last week, China’s government said it will vet technology companies operating in the country, while the Financial Times reported May 25 that China ordered state-owned companies to cut ties with U.S. consulting firms.

Harriet Ip, a Singapore-based spokeswoman for IBM, referred questions to IBM in the U.S. Jeffrey Cross, a Somers, New York-based spokesman, didn’t immediately respond to an e-mail seeking comment outside U.S. business hours.

“Security trumps everything,” said Duncan Clark, chairman of BDA China Ltd., a Beijing-based consultant to technology companies. “China doesn’t need the U.S. companies in the way it did for the last few decades.”

Snowden Revelations

The results of the government review will be submitted to a working group on Internet security led by President Xi Jinping, two of the people said.

U.S. technology sales in China have come under increasing threat following Edward Snowden’s revelations last June of a National Security Agency spying program. Forrester Research Inc. estimates purchases of information-technology products in China will rise 11 percent this year to $125 billion, meaning other U.S. technology companies, including Microsoft Corp., face threats to their business.

Microsoft Exclusion

Microsoft said this month it was “surprised” to learn that the China Central Government Procurement Center excluded its Windows 8 operating system from a purchase of energy- efficient computers. The official Xinhua News Agency called it “a move to ensure computer security.” China is the world’s largest market for personal computers.

“China’s government is in a strong position given Snowden’s disclosures,” Clark said. “If you give them an excuse, they will aggressively promote domestic brands.”

The directive would be a further blow to IBM’s business in China, where spending on server technology may grow 8.4 percent a year through 2017, compared with 2.2 percent globally, according to data compiled by IDC.

The company said its China sales fell 20 percent in the first quarter and, in an April conference call, Chief Financial Officer Martin Schroeter said the challenges were cyclical.

“We still see good opportunity over the long term” in China, he said.

IBM announced in January it would sell its low-end server computer business to Beijing-based Lenovo Group Ltd. for $2.3 billion. That transaction faces regulatory scrutiny including a U.S. national security review. Angela Lee, a Hong Kong-based spokeswoman for Lenovo, said she couldn’t immediately comment.

Asia Revenue

While IBM doesn’t break out revenue figures by country, 14 percent of its 2013 revenue came from Asia Pacific excluding Japan, according to data compiled by Bloomberg. In 2013, 9.7 percent of its revenue came from its server business, according to the data.

Under the proposed deal with Lenovo, IBM will keep its System z mainframes, Power servers and other higher-end hardware. Lenovo would get IBM servers that use x86 processors, an industry-standard technology.

The transaction includes BladeCenter and Flex System blade-style servers, slim devices that slide into racks, along with switches that run corporate computer networks.

In addition to concern that Armonk, New York-based IBM’s equipment poses a security threat, China’s government also believes IBM servers are more expensive in China than in other regions, the people said.

Inspur Surges

China Postal Savings Bank Co. is using servers made by Jinan-based Inspur Group Ltd. as part of a trial program that began in March 2013, the people said. The government plans to expand that trial to other banks, they said.

The group’s Inspur International Ltd. unit gained 9.4 percent, the most in almost a year, to close at HK$1.52 in Hong Kong trading. In Shenzhen, Inspur Electronic Information Industry Co. rose 4.7 percent.

Other agencies involved in the review include the National Development and Reform Commission, the China Banking Regulatory Commission, and the Ministry of Industry and Information Technology, the people said. The NDRC, the Finance Ministry, the central bank and the CBRC didn’t immediately respond to faxed requests for comment.

The U.S. indictment, announced May 19, led China to suspend its involvement in a cybersecurity working group and drew formal protests from the ministries of defense and foreign affairs. The State Internet Information Office likened the U.S. actions to “a thief yelling ‘Catch the thief.’ ”

The Chinese government is reviewing whether domestic banks' reliance on high-end servers from International Business Machines Corp. compromises the nation's financial security, people familiar with the matter said, in an escalation of the dispute with the U.S. over spying.